2021 (1) TMI 83 - AT - Income Tax

Addition on account of reversal of bad debts provision - assessee had made a provision for bad and doubtful debts and then added back the same amount while computing its total income - HELD THAT - Assessee eventually did not claim any deduction at the time of creation of provision for bad and doubtful debts. This mode of debiting the Profit and loss account and then adding back the same amount in computation of total income is tax-neutral. Once the creation of provision did not render reduction in the income, its later reversal, equally, cannot also lead to generation of taxable income notwithstanding the manner of depiction in the accounts. CIT(A) has categorically recorded this fact that in earlier years the assessee had made a provision for bad and doubtful debts and had added back the same while computing the total income. No material has been placed on record by the ld. DR to controvert this finding. In view of above discussion, we are satisfied that the ld. CIT(A) was justified in deleting the addition. - Decided in favour of assessee.

Summary

Issues:
Revenue's appeal against deletion of addition of ?1,67,64,206 made by Assessing Officer on account of reversal of bad debts provision for assessment year 2011-12.

Analysis:
The only issue raised by the Revenue in this appeal pertains to the deletion of an addition of ?1,67,64,206 made by the Assessing Officer concerning the reversal of bad debts provision by the assessee. The facts reveal that the assessee, a co-operative bank, debited ?5.00 crore for Bad and Doubtful Reserve, simultaneously reducing ?1,67,64,206 from this amount, resulting in a net debit of ?3,32,35,794 in its Profit & Loss account. The Assessing Officer contended that the reversed provision of ?1.67 crore should be treated as income separately, leading to an addition. However, the first appellate authority deleted this addition.

Upon careful consideration and examination of the material on record, it was noted that the assessee consistently followed a tax-neutral approach in previous years, where provision for bad debts was added back while computing total income. The tribunal observed that the manner in which the provision was debited to the Profit & Loss account and then added back in the income computation did not affect the taxable income. Since the provision creation did not reduce the income initially, its subsequent reversal should not generate taxable income, irrespective of the accounting depiction. The tribunal found no evidence to challenge the first appellate authority's finding that the assessee historically added back such provisions while computing total income. Consequently, the tribunal upheld the deletion of the addition of ?1,67,64,206.

In conclusion, the appeal by the Revenue was dismissed, affirming the first appellate authority's decision. The tribunal pronounced the order in open court on 11th December 2020.